SOUTHERN FINANCIAL BANCORP, iNC.
ANNUAL REPORT, 1996
UNLOCKING OPPORTUNITIES
Opportunities for growth. Opportunities for improvement.
Opportunities for a better life. Providing the right keys to
unlock the door when opportunity knocks is what differentiates us
from many of our competitors. Southern Financial has been
providing those keys for over ten years - to neighbors building or
buying their homes, to neighbors starting or expanding small
business, to neighbors managing their finances; a myriad of keys
enabling each person in our communities to decide how he or she
would like to do business with us.
Our key for home ownership revolves around a variety of
lending programs designed to enable a customer to afford the
opportunity for a better lifestyle. Southern Financial offers
competitive loan programs featuring adjustable rates and fixed
rates, to build, buy, or refinance residential property. Southern
Financial is one of the only lenders in the Northern Virginia and
Washington, DC areas to offer a residential construction program
whereby the customer is the general contractor and can oversee the
building of his or her home from start to finish. We are proud
that we are able to provide our neighbors with the right house
keys for a better life.
Southern Financial's key for small businesses involves
programs initiated by both the Bank and in conjunction with the
Small Business Administration so that every opportunity is made
available for the future success of each of our neighbor's
businesses. We are one of the area's top SBA lenders because we
have proven we can provide the key to develop innovative business
lending programs. We have grown as our reputation has been spread
by word of mouth. Southern Financial is a leader because we
listen carefully to the requirements and goals of each individual
business and then work with our customers to create a program that
is right for them. The year 1996 has seen lending in such diverse
areas as veterinary clinics, craft stores, golf courses, bed and
breakfasts, heavy machinery and even a small airport facility.
This past year has seen Southern Financial forging new keys
in the areas of deposit programs and accessibility to those funds
and fund management. We have developed new deposit products
featuring interest-bearing accounts, no monthly maintenance fee
accounts, business accounts, money market accounts and certificate
of deposit accounts. We have responded to our customers' needs to
manage their finances more effectively by installing an automated
direct access to deposit and loan information through access on
their telephones. Customer support has been improved and expanded
by upgrading our branch equipment providing greater efficiency and
speed through the use of a satellite system.
Our commitment to helping our neighbors remains strong. We
are proud to remain a small community bank dedicated to the
support and growth of our neighborhoods and communities, one
neighbor at a time.
FINANCIAL HIGHLIGHTS
(dollars in thousands, except per share data)
at December 31, at June 30,
_______________ _________________________
Financial Condition 1996 1995 1995 1994 1993
Total Assets $190,809 $164,801 $157,201 $124,108 $103,039
Net Loans 108,287 104,251 92,080 66,957 58,285
Total Deposits 164,279 143,814 137,680 100,562 79,465
Stockholders' Equity 16,401 15,775 15,173 14,019 8,610
Year 6 Months Year Year Year
Ended Ended Ended Ended Ended
Dec. 31, Dec. 31, June 30, June 30, June 30,
Results of Operations 1996 1995 1995 1994 1993
Interest Income $14,615 $6,731 $11,027 $7,615 $6,701
Interest Expense 7,776 3,629 5,931 3,650 3,096
Net Interest Income 6,839 3,101 5,095 3,966 3,604
Provision for Loan Losses 695 150 60 5 240
Net Interest Income after
Provision for Loan Losses 6,144 2,951 5,035 3,961 3,364
Other Income 1,186 514 814 1,128 1,483
Special SAIF Assessment 830 0 0 0 0
Other Expense 5,077 2,316 3,716 3,147 2,840
Income before Taxes 1,423 1,150 2,134 1,942 2,007
Provision for Income Taxes 469 414 833 757 763
Income before Cumulative Effect
of Accounting Change 954 735 1,301 1,184 1,244
Cumulative Effect of Accounting
Change 0 0 0 0 10
NET INCOME 954 735 1,301 1,184 1,254
Per Common Share Data:
Net Income Fully Diluted $0.59 $0.46 $0.81 $1.02* $1.43*
Dividends Paid per Share $0.24 $0.12 $0.20 $0.20 $0.20
Book Value per Share $10.32 $10.05 $9.82 $9.06 $8.65
Weighted Average Shares
Outstanding 1,546,179 1,508,370 1,505,016 1,140,582* 869,519*
Actual Shares Outstanding 1,564,248 1,385,092 1,369,149 1,366,694 869,519
Cumulative Convertible
Preferred Stock
Actual Shares Outstanding 15,634 16,634 16,634 17,388 17,388
at or at or at or at or at or
for the for the for the for the for the
Year 6 Months Year Year Year
Ended Ended Ended Ended Ended
Dec. 31, Dec. 31, June 30, June 30, June 30,
Growth & Financial Ratios 1996 1995 1995 1994 1993
% Change in Equity 3.97% 3.97% 8.23% 62.82% 14.96%
% Change in Assets 15.78% 4.83% 26.66% 20.44% 33.04%
% Change in Loans 3.87% 13.22% 37.52% 14.88% 21.19%
Equity/Assets Ratio 8.60% 9.57% 9.65% 11.30% 8.36%
Return on Average Assets 0.52% 0.91% 0.90% 1.06% 1.45%
Operating Expense to
Average Assets 3.25% 2.88% 2.56% 2.81% 3.28%
Return on Average Equity 5.91% 9.50% 8.95% 10.06% 15.40%
Net Interest Margin 3.93% 3.98% 3.60% 3.61% 4.20%
Efficiency Ratio 73.61% 64.05% 62.88% 61.78% 55.82%
Other Data:
Number of Full Service Branches 10 9 9 6 5
Number of ATMs 8 7 7 4 3
*Not adjusted to reflect stock dividend of August, 1996
Dear Shareholder:
The end of 1996 marks the completion of Southern Financial's first full
year as a commercial bank. It was a year where your
Bank met new challenges and positioned itself decisively for the future.
Most importantly, it was the year where we incurred a one-time pretax
assessment of $830,268 as your Bank's share of the cost of recapitalizing the
Savings Association Insurance Fund (SAIF).
We can debate the fairness of the assessment. Your Bank never cost the SAIF
fund a dime. We have in fact paid
over $2.6 million in insurance premiums to FSLIC since we opened. The
important fact for Southern Financial Bank is that this assessment should
put the S&L debacle behind us forever. Moreover, it will reduce our SAIF
premiums from approximately $71,000
per quarter, where they were early in 1996 to approximately $27,000 per
quarter next year.
Had the SAIF assessment not taken place, 1996 would have been another
record year for your Bank's earnings. Net income after taxes
for Southern Financial Bank without the SAIF assessment was $1,509,991 for
1996 compared to $1,398,847 for 1995.
Including the SAIF assessment, 1996 was
still a solid year for your Bank. Earnings were $953,711 in 1996 compared
to $1,398,847 in 1995.
Most importantly, your Bank's theme for
the coming year is "Unlocking Opportunities
in Our Neighborhood". With over a year as a commercial bank under our belt
and over ten years serving our diverse communities, your
(CHART FROM ANNUAL REPORT REPRODUCED AS TABLE)
Net Income (In Thousands)
June 30, 1993 $1,254
June 30, 1994 1,184
June 30, 1995 1,301
December 31, 1995 (annualized) 1,399
December 31, 1996 954
December 31, 1996 (without SAIF assessment) 1,510
Bank has made enormous strides in providing innovative financing to small
and medium sized businesses and in offering a full spectrum of banking
services to our growing base of
individual clients.
One area where Southern Financial has unlocked opportunities for its
clients is through creative use of the various programs offered by the
Small Business Administration (SBA). Your Bank is a recognized leader in
Northern Virginia and in the District of Columbia in small business
lending. Your Bank has been an aggressive and creative lender under the
SBA's 504 Loan Program, an economic development financing program conducted
in conjunction with various state programs. In addition, Southern Financial
has become a major competitor in Northern Virginia and the District of
Columbia in the SBA's 7a lending program, where the SBA guarantees a
portion of the loans extended by your Bank. In addition, your Bank has been
a regional pioneer in the SBA's Capline and Export Working Capital Loan
programs. During the last two years Southern Financial closed over 75 loans
under the 504 and 7a program for a total of over $34 million.
Southern Financial's use of these programs for its small business clients
has ranged over a wide spectrum of local businesses from veterinary clinics
to government contractors, from financing the construction of a bowling
alley to a pediatric dental clinic and from small manufacturers to local
retailers. Virtually all of our small business loans develop into full
banking relationships including deposit accounts and other banking
services, often including conventional working capital lines extended by
the Bank.
In addition, your Bank continues to be active in residential construction
lending for owner/builders. Owner/builder construction loans closed in 1996
reached $8 million.
We commit ourselves to continuing to "unlock opportunities in our
neighborhood" for our small business and individual clients during 1997 and
beyond. Positioning your Bank as an integral factor in our community's
economic growth will continue to foster the growth of your Bank's
franchise value.
I look forward to seeing you at our Annual Meeting April 24.
Very truly yours,
/s/Georgia s. Derrico
Georgia S. Derrico
Chairman & CEO
(CHART FROM ANNUAL REPORT REPRODUCED AS TABLE)
Book Value (fully diluted)
June 30, 1993 $8.65
June 30, 1994 9.06
June 30, 1995 9.82
December 31, 1995 10.05
December 31, 1996 10.32
MANAGEMENT'S DISCUSSION AND ANALYSIS
On December 1, 1995 Southern Financial Federal Savings Bank converted to a
Virginia chartered commercial bank, Southern Financial Bank. At that time a
bank holding company, Southern Financial Bancorp, Inc. ("Southern
Financial" or "the Bank") was formed and
which acquired all of the stock of Southern Financial Bank. Also, on
December 1, 1995 Southern Financial changed its fiscal year end
to December 31 from June 30.
(CHART FROM ANNUAL REPORT REPRODUCED AS TABLE)
Asset Growth ($ in Millions)
December 31, 1992 $88.0
December 31, 1993 111.7
December 31, 1994 144.6
December 31, 1995 164.8
December 31, 1996 190.8
The total assets of Southern Financial were $190.8 million at December 31,
1996, an increase of $26.0 million, or 15.8%, from $164.8 million at
December 31, 1995. This increase was primarily due to an increase in
mortgage-backed securities of $17.1 million, or 36.3%, to $64.1 million at
December 31, 1996 from $47.0 million at December 31, 1995 and, to a lesser
extent, an increase in non-mortgage loans of $3.5 million. Total
liabilities increased $25.4 million, or 17.0%, to $174.4 million at
December 31, 1996, from $149.0 million at December 31, 1995.
Loans receivable, net of deferred fees and allowances for losses, were
$108.3 million at December 31, 1996, an increase of $4.0 million over
$104.3 million at December 31, 1995. The Bank's lending strategy is to
retain for portfolio those residential mortgage loans with interest rates
that adjust periodically and sell those residential mortgage loans
originated with fixed rates. During the twelve months ended
December 31, 1996, Southern Financial
continued to emphasize loan originations connected with various lending
programs of the U.S. Small Business Administration Program.
As a result, the growth in the loan portfolio occurred in non-mortgage
loans, which
increased by $3.5 million, and in loans secured by nonresidential property,
which increased by $6.2 million. The weighted average interest rate on
total loans receivable decreased to 9.18% at December 31, I996 from 9.32%
at December 31, 1995.
The portfolio of mortgage-backed securities at December 31, l 996
consisted of $63.2 million in securities classified as held-to-maturity and
$0.9 million classified as available-for-sale. The portfolio of securities
held-to-maturity consisted of FNMA, GNMA and FHLMC participation
certificates and collateralized mortgage obligations, of which $8.5 million
had fixed rates of interest and original maturities of 15 years. The
remainder of $54.7 million had adjustable rates of interest, all of which
adjust in one year or less. The securities classified as available-for-sale
had fixed rates of interest and original maturities of 15 years.
The increase in assets was funded primarily by an increase in customer
deposits. Deposits at December 31, 1996 were $164.3 million, an
(CHART FROM ANNUAL REPORT REPRODUCED AS TABLE)
Deposit Levels ($ in Millions)
December 31, 1992 $71.0
December 31, 1993 86.4
December 31, 1994 120.2
December 31, 1995 143.8
December 31, 1996 164.3
increase of
$20.5 million, or 14.2%, over deposits of $143.8 million at December 31,
1995. All deposit categories increased with the largest increase occurring
in certificates of deposit which increased by $13.7 million, or 13.0%, to
$119.4 million at December 31, 1996 from $105.6 million at December 31,
1995 . The weighted average interest rate for all accounts decreased to
4.57% at December 31, 1996 from 4.89% at December 31, 1995. The increase in
deposits reflects the opening in June of 1996 of a new branch in
Winchester, as well as growth in the Bank's customer base at all branches.
Advances from the Federal Home Loan Bank of Atlanta ("FHLB") totaled $8.5
million at December 31, 1996, an increase of $4.5 million from $4.0 million
at December 31, 1995.
Results of Operation
The operating results of the Bank depend primarily on its net interest
income, which is the difference between interest and dividend income on
interest-earning assets, such as loans, mortgage-backed securities and
investments, and interest expense on interest-bearing liabilities such as
deposits and borrowings. Operating results are also affected by the level
of its noninterest income including income or loss from the sale of loans
and fees and service charges on deposit accounts, and by the level of its
operating expenses, including compensation, premises and equipment, deposit
insurance assessments and income taxes. The following tables provide
information regarding changes in interest income and interest expense, as
well as the underlying components of interest-earning assets and
interest-bearing liabilities.
The following table presents, for the periods indicated, average monthly
balances of and weighted average yields on interest-earning assets and
average balances and weighted average effective interest paid on interest
bearing liabilities. Average balances are calculated on a monthly basis.
The subsequent table presents information regarding changes in interest
income and interest expense for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is
provided on changes attributable to changes in volume (changes in volume
multiplied by old rate) and changes in rates (changes in rates multiplied
by old volume).
Rate Sensitivity Analysis (in thousands)
Year ended Six months ended Year ended
December 31 December 31 June 30
1996 1995 1995
Average Average Average Average Average Average
balance yield/ balance yield/ balance yield/
rate rate rate
Interest-earning assets
Loans receivable 106,254 9.70 100,777 9.86 81,237 9.26
Mortgage-backed securities 57,846 6.29 48,907 6.49 54,544 5.78
Investments 10,064 6.68 6,098 5.81 5,712 6.10
Total interest-earning assets 174,164 8.39 155,782 8.64 141,493 7.79
Interest-bearing liabilities
Deposits 158,151 4.70 138,322 4.97 118,043 4.43
Borrowings 6,077 5.63 5,667 6.69 11,250 6.21
Total Interest-bearing
liabilities 164,228 4.73 143,989 5.04 129,293 4.59
Average dollar difference
between interest-earning assets
and interest-bearing liabilities 9,936 11,793 12,200
Interest rate spread 3.66 3.60 3.20
Interest margin 3.93 3.98 3.60
Rate/Volume Analysis
(in thousands)
Year ended Six months ended
December 31, 1996 December 31, 1995
compared to six months compared to year
ended December 31, 1995 ended June 30, 1995
Volume Rate Total Volume Rate Total
Interest Income
Loans receivable 535 (160) 375 1,901 510 2,411
Mortgage-backed securities 560 (95) 465 (99) 118 19
Investments 255 59 314 19 (14) 5
Total interest income 1,350 (196) 1,154 1,821 614 2,435
Interest expense
Deposits 890 337 553 963 684 1,647
Borrowings 30 (67) (37) (379) 59 (320)
Total interest expense 920 (404) 516 584 743 1,327
Net interest income 430 208 638 1,237 (129) 1,108
Comparison of the year ended December 31, 1996 with the six months ended
December 31, 1995
Southern Financial's net income for the year ended December 31, 1996
totaled $953,711,a decrease on an annualized basis of 35.1%, from $735,319
for the six months ended December 31, 1995. The decrease in net income was
primarily due to an increase on an annualized basis of 212% in deposit
insurance assessments and of 132% in provision for loan losses; these were
partially offset by an increase on an annualized basis of 10.3% in net
interest income and 15.3% in other operating income. Fully diluted earnings
per share for the year ended December 31, 1996 was $0.59 as compared to
$0.46 for the six months ended December 31, l995. The weighted average
number of shares of common stock outstanding was 1,546,179 for the year
ended December 31, 1996 and 1,508,370 for the six months ended December 31,
1995.
Net interest income. Net interest income before provision for loan losses
was $6.8 million for the year ended December 31, 1996 and $3.1 million for
the six months ended December 31, 1995. On an annualized basis, this
represents an increase of 10.3%. This increase was due to an increase in
the average level of earning assets from $155.8 million to $174.2 million.
The interest rate spread increased from 3.60% for the six months ended
December 31, 1995 to 3.66% for the year ended December 31, 1996, but the
interest margin decreased from 3.98% to 3.93% over the same periods. The
decrease in the interest rate margin was due to the fact that interest
bearing liabilities increased by a greater percentage than interest earning
assets.
Total interest income. Total interest income was $14.6 million for the year
ended December 31, l996, an increase on an annualized basis of 8.6%, from
$6.7 million for the six months ended December 31, 1995. This increase
resulted from a growth in interest earning assets which more than offset
the decline in related yields. Interest earning assets averaged $174.2
million for the year ended December 31, 1996, up from
$155.8 million for the six months ended
December 31, 1995. This increase was due partially to the increase in
average loans
receivable from $100.8 million for the six
months ended December 31, 1995 to $106.3 million for the year ended
December 31, 1996.
The yield on total interest-earning assets decreased 25 basis points to
8.39% for the year ended December 31, 1996 from 8.64% basis for the six
months ended December 31, 1995. For the year ended December 31, 1996, the
yield on loans receivable was 9.70%, down from 9.86% for the six months
ended December 31, 1995. This decrease reflects the fact that lending rates
were lower in the latter period than in the former, as evidenced by
successive declines in the Prime Rate from 9% to 8.25% from July 8, 1995 to
February 1, 1996. The average yield on mortgage-backed securities decreased
from 6.49% for the six months ended December 31, 1995 to 6.29% for the year
ended December 31, 1996.
Total interest expense. Total interest expense for the year ended December
31, 1996 was $7.8 million, which represents on an annualized basis an
increase of 7.1%, from $3.6 million for the six months ended December 31,
1995. This increase was due to an increase in the average balance of
interest-bearing liabilities which was more than offset by decreases in the
weighted effective rates paid thereon. For the year ended December 31, 1996
average interest bearing liabilities were $164.2 million, up $20.2 million
from $144.0 million for the six months ended December 31, 1995. The average
effective rate paid on interest bearing liabilities was 4.73% for the year
ended December 31, 1996, a decrease of 31 basis points from 5.04% for the
six months ended December 31, 1995.
Provision for loan losses. The provision for loan losses amounted to
$695,000 for the year ended December 31, 1996, an increase of 132% on an
annualized basis over the provision of $150,000 for the six months ended
December 31, 1995. In recognition of any nonperforming loans and the
inherent risk in lending, Southern Financial has established an allowance
for loan losses. The allowance for loan losses is a reserve of funds
established to absorb the inherent risk in lending after evaluating the
loan portfolio considering current economic
conditions, changes in the nature and volume of lending and past loan
experience. During the year ended December 31, l996, the Bank's volume of
nonresidential mortgages and commercial loans held in portfolio increased.
These loans tend to carry a higher risk classification. Consequently the
Bank felt it was necessary to increase the allowance for loan losses. The
Bank's opinion is that the allowance for loan losses at December 31, 1996
remains adequate. Although the Bank believes that the allowance is
adequate, there can be no assurances that additions to such allowance will
not be necessary in future periods, which would adversely affect the Bank's
results of operations. The allowance for loan losses at December 31, 1996
was $1.5 million, or 1.41% of total net loans receivable versus 1.14% at
December 31, 1995.
Other income. Other income totaled $1.2 million for the year ended December
31, 1996, an increase on an annualized basis of 15.3%, from $514,000 for
the six months ended
December 31, 1995. This increase was
attributable primarily to fee income which increased on an annualized basis
by 46.3% to
(CHART FROM ANNUAL REPORT REPRODUCED AS TABLE)
Allowance for Loan Losses vs. Total Loans ($ in Thousands)
Allowance Total Loans
June 30, 1994 $1,008 $68,455
June 30, 1995 1,057 93,578
December 31, 1995 1,190 105,896
December 31, 1996 1,501 110,200
$887,000 for the year ended December 31, 1996 from $303,000 for
the six months ended December 31, 1995. Fee income, consisting primarily of
transaction fees on NOW accounts, increased due to increased volume in
these types of deposit accounts. Gain on sale of loans decreased 3.6% on an
annualized basis to $210,000 for the year ended December 31, 1996 from the
six months ended December 31, 1995, in spite of the fact that originations
of loans held for sale increased 22.1% on an annualized basis to $10.5
million for the year ended December 31, 1996 from $4.3 million for the six
months ended December 31, 1995. The reason for this was that the average
spread on loans closed in the year ended
December 31, 1996 was less than the average spread earned on loans closed
in the six months ended December 31, 1995.
Other expenses. Other expenses for the year ended December 31, 1996 were
$5.9 million, an increase on an annualized basis of 27.5% from $2.3 million
for the six months ended December 31, 1995. Increases on an annualized
basis occurred in most categories of expenses. The most significant factor
contributing to the increase was the growth in deposit insurance
assessments and the opening of a new branch in June, 1996.
Employee compensation and benefits
increased on an annualized basis 18.4% to $2.1 million for the year ended
December 31, 1996 from $907,000 for the year ended June 30, 1995. This
increase reflects the additional personnel needed to staff one new branch
and normal wage increases for existing personnel.
Expenses for premises and equipment increased on an annualized basis 24.9%
to $1.6 million for the year ended December 31, 1996
from $637,000 for the six months ended
December 31, 1995. This increase reflects the costs associated with opening
one new branch and supporting the Bank's growth. Data
processing costs are included and increased due to the increase in the
number and activity of customer deposit accounts.
Deposit insurance assessments increased 212% on an annualized basis to
$1.1million for the year ended December 31, 1996 from $174,000 for the six
months ended December 31, 1995. The increased deposit insurance assessment
reflects a one-time assessment on thrifts and banks with thrift deposits to
recapitalize the Savings
Association Insurance Fund. The Bank's one-time
assessment was $830,000.
Other expenses decreased 3.6% on an
annualized basis to $989,000 for the year ended December 31, 1996 from
$513,000 for the six months ended December 31, 1995. This decrease was
partly due to the fact that there were non-recurring costs in the six
months ended December 31, 1995 of approximately $60,000 relating to the
Bank's conversion to a Virginia commercial bank charter.
Comparison of the six months ended December 31, 1995 with the year ended
June 30, 1995
Southern Financial's net income for the six months ended December 31, 1995
totaled $735,000, an increase on an annualized basis of 13.0%, from $1.3
million for the year ended June 30, 1995. The increase in net income was
primarily due to an increase on an annualized basis of 21.7% in net
interest income which was partially offset by an increase on an annualized
basis of 24.7% in other expenses. Fully diluted earnings per share for the
six months ended December 31, 1995 was $0.46 as compared to $0.81 for the
year ended June 30, 1995. The weighted average number of shares of common
stock outstanding were 1,508,370 for the six months ended December 31, 1995
and 1,505,016 for the year ended June 30, 1995.
Net interest income. Net interest income before provision for loan losses
was $3.1 million for the six months ended December 31, 1995 and $5.1
million for the year ended June 30, 1995. On an annualized basis, this
represents an increase of 21.7%. This increase was due to an increase in
the interest rate spread to 3.60% for the six months ended December 31,
1995 from 3.20% for the year ended June 30, 1995. Also, net loans
receivable increased to $104.3 million at December 31, 1995, an increase of
$12.2 million, or 13.2%, from $92.1 million at June 30, 1995.
Total interest income. Total interest income was $6.7 million for the six
months ended December 31, 1995, an increase on an annualized basis of
22.1%, from $11.0 million for the year ended June 30, 1995. This increase
resulted from both a growth in interest-earning assets as well as the
related yields. Interest-earning assets averaged $155.8 million for the six
months ended
December 31, 1995, up from $141.5 million for the year ended June 30, 1995.
This increase was due to the increase in average loans receivable from
$81.2 million for the year ended June 30, 1995 to $ 100.8 million for the
six months ended December 31, 1995.
The yield on total interest-earning assets increased 85 basis points to
8.64% for the six months ended December 31, 1995 from 7.79% for the year
ended June 30, 1995. For the six months ended December 31, l995, the yield
on loans receivable was 9.86% up from 9.26% for the year ended June 30,
1995. This increase reflects the originations of nonresidential loans which
typically carry higher interest rates. The average yield on mortgage-backed
securities increased from 5.78% for the year ended
June 30, 1995 to 6.49% for the six months
ended December 31, 1995.
Total interest expense. Total interest expense for the six months ended
December 31, 1995 was $3.6 million, which represents on an annualized basis
an increase of 22.4%, from $5.9 million for the year ended June 30, 1995.
This increase was due to increases in both the average balance of
interest-bearing liabilities as well as the
weighted effective rates paid thereon. For the
six months ended December 31, 1995 average interest-bearing liabilities
were $144.0 million, up $14.7 million from $129.3 million for the year
ended June 30, 1995. The average effective rate paid on interest bearing
liabilities was 5.04% for the six months ended December 31, 1995, an
increase of 45 basis points from 4.59% for the year ended June 30, 1995.
Provision for loan losses. The provision for loan losses amounted to
$150,000 for the six months ended December 31, 1995, an increase over the
provision of $60,000 for the twelve months ended June 30, 1995. During the
six months ended December 31, 1995, the Bank's volume of nonresidential
mortgages and
commercial loans held in portfolio increased. These loans tend to carry a
higher risk
classification. Consequently, the Bank felt it was necessary to increase
the allowance for loan losses. The Bank's opinion is that the allowance for
loan losses at December 31, 1995 remains adequate. The allowance for loan
losses at December 31, 1995 was $1.2 million, or 1.14% of total net loans
receivable.
Other income. Other income totaled $514,000 for the six months ended
December 31, 1995, an increase on an annualized basis of 26.3%, from
$814,000 for the year ended June 30,1995. The increase was attributable in
part to the gain on sale of mortgage-backed securities available-for-sale
of $63,000 for the six months ended December 31, 1995. Fee income increased
on an annualized basis by 20.3% to $303,000 for the six months ended
December 31,1995 from $504,000 for the year ended June 30, 1995. Fee income
consisting primarily of transaction fees on NOW accounts, increased due to
increased volume in these types of deposit accounts. Gain on sale of loans
decreased to $109,000 for the six months ended December 31, 1995. This
decrease resulted from a decrease in originations of loans held for sale to
$4.3 million for the six months ended December 31,1995 from $11.6 million
for the year ended June 30, 1995 and a corresponding decrease to $4.4
million in sales of loans held for sale for the six months ended December
31, 1995 from $12.3 million for the year ended June 30,1995.
Other expenses. Other expenses for the six months ended December 31, 1995
were $2.3 million, an increase on an annualized basis of 24.7% from $3.7
million for the year ended June 30, 1995. Increases on an annualized basis
occurred in all categories of expenses. The most significant factor
contributing to the increases was the growth of the Bank. In the year ended
June 30, 1995, three new branches were opened. One branch was opened in
August, 1994 and two branches in April, 1995.
Employees compensation and benefits increased on an annualized basis 14.9%
to $907,000 for the six months ended December 31, 1995 from $1.6 million
for the year ended June 30, 1995. The increase reflects the additional
personnel needed to staff three new branches and normal wage increases for
existing personnel.
Expenses for premises and equipment
increased on an annualized basis 25.9% to $637,000 for the six months ended
December 31, 1995 from $1.0 million for the year ended June 30, 1995. The
increase reflects the cost associated with opening three new branches and
supporting the Bank's growth. Data processing costs are included and
increased due to the increase in the number and activity of customer
deposit accounts.
Deposit insurance assessments increased on an annualized basis 25.8% to
$174,000 for the six months ended December 31, 1995 from $277,000 for the
year ended June 30, 1995. The deposit insurance assessment is based on the
dollar volume of deposit accounts and reflects the growth in the customer
deposit base.
Other expenses increased 37.1% on an annualized basis to $513,000 for the
six months ended December 31, 1995 from $747,000 for the year ended June
30, 1995. This increase was partly due to $26,000 in repairs and
maintenance costs incurred on real estate owned and an adjustment of
$30,000 on real estate owned to fair value. The Bank has determined that
real estate owned is recorded at current fair value less estimated selling
cost. The increase in other expenses was, also, partly the result of costs
of approximately $60,000 relating to the Bank's conversion to a Virginia
commercial bank charter, the aforementioned cost of opening new branches
and growth in the customer deposit base.
Asset/Liability Management
Southern Financial, like most other banks and thrift institutions, is
engaged primarily in the business of investing funds obtained from deposits
and borrowings into interest-bearing loans and investments. Consequently,
Southern Financial's earnings depend to a significant extent on its net
interest income, which is the difference between (i) the interest income on
loans, mortgage-backed securities and other investments and (ii) the
interest expense on deposits and borrowings. Southern Financial, to the
extent that its interest bearing liabilities do not reprice or mature at the
same time as interest-bearing assets, is subject to interest
rate risk and corresponding fluctuations in its net interest income.
Asset/liability management policies have been
employed in an effort to manage Southern Financial's interest-earning
assets and interest-bearing liabilities, thereby controlling the volatility
of net interest income, without having to incur unacceptable levels of
credit risk.
With respect to the Bank's mortgage loan portfolio, it is Southern
Financial's policy to
keep in portfolio those mortgages which have an adjustable interest rate
and to sell most fixed rate mortgages originated into the secondary market.
This helps control Southern Financial's exposure to rising interest rates.
It is the current policy of the Bank that the core securities portfolio
will be invested in adjustable rate mortgage securities with a diversified
mix of repricing periods and indices. The portfolio now consists of FNMA,
GNMA and FHLMC adjustable rate participation certificates and private label
collateral mortgage obligations. All of these securities adjust annually or
more frequently. From time to time, the Asset/Liability Management
Committee may elect to purchase and hold for sale fixed rate
mortgage-backed securities as well as federal agency preferred stock and
federal agency bonds when the yield spread between fixed rate and
adjustable rate securities substantially favors the former, and the risk of
substantial rises in interest rates is acceptably low. In this connection,
the Bank currently holds approximately $9.4 million in 15-year fixed rate
mortgage-backed securities, $4.3 million in FHLMC preferred stock, and $2.0
million in Federal Home Loan Bank Notes which are callable quarterly at the
option of the issuer, have a fixed rate of interest, and mature in under
five years.
Liquidity and Capital Resources
Southern Financial's principal sources of funds are deposits, loan
repayments, proceeds from the sale of loans, repayments from
mortgage-backed securities, repayments from federal agency bonds, FHLB
advances, other borrowings and retained income.
At December 31, 1996, Southern Financial had $4.3 million of undisbursed
loan funds and $9.1 million of approved loan commitments.
The amount of certificate of deposit accounts maturing in calendar year
1997 is $101.2 million. In addition, $6.5 million of the $8.5 million of
FHLB advances are scheduled to mature in calendar year 1997. It is
anticipated that funding requirements for these commitments can be met from
the normal sources of funds previously described.
Southern Financial is subject to regulations of the Federal Reserve Board
that impose certain minimum regulatory capital requirements. Under current
Federal Reserve Board regulations, these requirements are: (a) leverage
capital of 4% of adjusted average total assets; (b) tier I capital of 4% of
risk-weighted assets; (c) tier I and II capital of 8% of risk-weighted
assets. At December 31, 1996, the Bank's capital ratios were: 8.7% leverage
capital; 15.4% tier I capital; and 16.6% tier I and II capital.
Impact of Inflation and Changing Prices
The financial statements and related notes presented herein have been
prepared in accordance with generally accepted accounting principles. These
require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike many industrial companies, substantially all of the assets and
virtually all of the liabilities of Southern Financial are monetary in
nature. As a result, interest rates have a more significant impact on the
Bank's performance than the effects of general levels of inflation.
Interest rates may not necessarily move in the same direction or in the
same magnitude as the prices of goods and services. However, other expenses
do reflect general levelsof inflation.
Southern Financial Bancorp. Inc.
Financial statements As of
December 31, 1996 and 1995
Together with Auditors' Report
Report of Independent Public Accountants
To the Board of Directors of
Southern Financial Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition of
Southern Financial Bancorp, Inc. (a Virginia corporation) as of December 31,
1996 and 1995, and the related consolidated statements of income, changes
in stockholders' equity and
cash flows for the year ended December 31, 1996, for the six months ended
December 31, 1995, and for the year ended June 30, 1995. These financial
statements are the responsibility of the Bancorp's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Southern Financial
Bancorp, Inc. as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the year ended December 31, 1996, for the
six months ended December 31, 1995, and for the year ended June 30, 1995,
in conformity with generally accepted accounting principles.
Washington, D.C.,
February 4, 1997
/s/Arthur Andersen, LLP
Consolidated Statements of Condition
As of December 31, 1996 and 1995
Assets Dec. 31, 1996 Dec. 31,1995
Cash and due from banks $4,004,149 $3,894,884
Overnight earning deposits 2,395,574 1,795,902
Investment securities, available-for-sale 4,205,287 2,827,625
Investment securities, held-to-maturity
(estimated market value of $2,001,875
and $0, respectively) 2,000,000 -
Mortgage-backed securities, available-for-sale 894,332 1,045,098
Mortgage-backed securities, held-to-maturity
(estimated market value of $62,972,202 and
$45,674,350, respectively) 63,217,243 45,997,777
Loans held for sale 444,500 170,000
Loans receivable, net 108,286,903 104,251,481
Federal Home Loan Bank stock, at cost 867,600 950,000
Bank premises and equipment, net 1,487,446 1,146,553
Interest receivable 1,328,551 1,167,022
Real estate owned 340,023 357,023
Other assets 1,337,114 1,197,385
Total assets $190,808,722 $164,800,750
Liabilities and Stockholders' Equity Dec. 31, 1996 Dec. 31, 1995
Liabilities:
Deposits $164,279,105 $143,813,686
Advances from Federal Home Loan Bank 8,500,000 4,000,000
Advances from borrowers for taxes and insurance 105,292 113,631
Other liabilities 1,523,373 1,098,362
Total liabilities 174,407,770 149,025,679
Commitments
Stockholders' equity:
6% Cumulative convertible preferred stock,
$.01 par value, 500,000 shares authorized,
15,634 shares issued and outstanding,
$241,193 aggregate liquidation preference,
respectively 156 166
Common stock, $.01 par value,
5,000,000 shares authorized,
1,594,122 and 1,564,248 shares issued
and outstanding, respectively, as
of December 31, 1996 15,941 13,912
Capital in excess of par value 15,276,373 12,796,014
Retained earnings 1,655,575 3,050,284
Net unrealized gain on securities available-for-sale (76,006) 14,685
Treasury stock, at cost (471,087) (99,990)
Total stockholders' equity 16,400,952 15,775,071
Total liabilities and stockholders' equity $190,808,722 $164,800,750
The accompanying notes are an integral part of these financial statements.
Consolidated Statements of Income
For the Year Ended December 31, 1996,
For the Six Months Ended December 31, 1995, and
For the Year Ended June 30, 1995
Six Months
Year Ended Ended Year Ended
Dec. 31, Dec. 31, June 30,
1996 1995 1995
Interest income:
Loans $10,308,273 $4,967,233 $7,523,092
Mortgage-backed securities and
other investments 4,306,296 1,763,665 3,503,555
Total interest income 14,614,569 6,730,898 11,026,647
Interest expense:
Deposits 7,433,334 3,439,788 5,232,831
Borrowings 342,078 189,675 698,457
Total interest expense 7,775,412 3,629,463 5,931,288
Net interest income 6,839,157 3,101,435 5,095,359
Provision for loan losses 695,000 150,000 60,000
Net interest income after provision
for loan losses 6,144,157 2,951,435 5,035,359
Other income:
Gain on sale of loans 209,962 108,846 267,728
Fee income 886,747 302,992 503,693
Gain on sale of mortgage-backed
securities, net - - 63,208 -
Other 89,553 39,301 43,063
Total other income 1,186,262 514,347 814,484
Other expense:
Employee compensation and benefits 2,147,974 907,371 1,579,581
Premises and equipment 1,591,235 637,105 1,012,374
Deposit insurance assessments 1,085,536 174,145 276,816
Professional fees 93,223 84,209 100,294
Other 989,139 513,233 746,991
Total other expense 5,907,107 2,316,063 3,716,056
Income before income taxes 1,423,312 1,149,719 2,133,787
Provision for income taxes 469,600 414,400 833,070
Net income $ 953,712 $ 735,319 $1,300,717
Earnings per common share:
Primary earnings per share $ 0.59 $ 0.46 $ 0.82
Fully diluted earnings per share $ 0.59 $ 0.46 $ 0.81
Weighted average shares outstanding 1,546,179 1,508,370 1,505,016
The accompanying notes are an integral part of these financial statements.
Consolidated Statements of Changes in Stockholders' Equity
For the Year Ended December 31, 1996,
For the Six Months Ended December 31, 1995, and
For the Year Ended June 30, 1995
Net Unrealized
Capital in Gain (Loss) Total
Preferred Common Excess of Retained Treasury on Securities Stockholders'
Stock Stock Par Value Earnings Stock Available for-sale Equity
Balance, June 30, 1994 $174 $7,454,696 $3,364,588 $3,242,751 $- $(43,601) $14,018,608
Dividends on preferred
and common stock - - - (258,477) - - (258,477)
Conversion of preferred
shares to common stock (8) 6,032 (6,024) - - - -
Options exercised - 8,000 4,080 - - - 12,080
Four-for-three stock split
effected in the form of a dividend - 2,488,720 (2,488,720) - - - -
Stock dividend of 10% - 995,744 809,041 (1,804,785) - - -
Net unrealized gain on
securities available-for-sale - - - - - 99,895 99,895
Net income - - - 1,300,717 - - 1,300,717
Balance, June 30, 1995 166 10,953,192 1,682,965 2,480,206 - 56,294 15,172,823
Dividends on preferred
and common stock - - - (165,241) - - (165,241)
Options exercised - 58,811 114,958 - - - 173,769
Treasury stock - - - - (99,990) - (99,990)
Net unrealized loss on
securities available-for-sale - - - - - (41,609) (41,609)
Change in par value to 0.01 per share - (10,998,091) 10,998,091 - - - -
Net income - - - 735,319 - - 735,319
Balance, December 31, 1995 166 13,912 12,796,014 3,050,284 (99,990) 14,685 15,775,071
Dividends on preferred
and common stock - - - (360,971) - - (360,971)
Conversion of preferred
shares to common stock (10) 16 (6) - - - -
Options exercised - 594 494,778 - - - 495,372
Stock dividend of 10% - 1,419 1,985,587 (1,987,006) - - -
Treasury stock - - - (444) (371,097) - (371,541)
Net unrealized gain on
securities available-for-sale - - - - - (90,691) (90,691)
Net income - - - 953,712 - - 953,712
Balance, December 31, 1996 $156 $15,941 $15,276,373 $1,655,575 $(471,087) $(76,006) $16,400,952
The accompanying notes are an integral part of these financial statements.
Southern Financial Bancorp, Inc.
Consolidated Statements of Cash Flows
For the Year Ended December 31, 1996,
For the Six Months Ended December 31, 1995, and
For the Year Ended June 30, 1995
Six Months
Year Ended Ended Year Ended
Dec. 31, Dec. 31, June 30,
1996 1995 1995
Cash flows from operating activities:
Net income $ 953,712 $ 735,319 $ 1,300,717
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 251,249 141,577 451,660
Provision for loan losses 695,000 150,000 60,000
(Benefit) provision for
deferred income taxes (13,849) 61,488 53,590
Gain on sale of loans (209,962) (108,846) (267,728)
Loss on real estate owned 17,000 30,000 -
Gain on sale of securities, net - (63,208) -
Amortization of deferred loan fees (431,247) (290,978) (652,294)
Originations of loans held for sale (10,676,888) (4,328,475) (11,613,600)
Proceeds from sales of loans 10,612,350 4,422,321 12,324,528
Increase in interest receivable (161,529) (112,442) (381,240)
Increase in other assets (94,036) (562,596) (144,454)
Increase (decrease) in other
liabilities 438,861 (46,886) 343,113
Net cash provided by
operating activities 1,380,661 27,274 1,474,292
Cash flows from investing activities:
Net fundings of loans receivable (4,299,175) (12,030,737) (24,530,444)
Purchases of investment securities (3,499,810) (1,807,000) (381,630)
Purchases of mortgage-backed securitie (28,927,466) (3,151,005) (10,271,977)
Sales of mortgage-backed securities
available-for-sale - 4,848,694 -
Paydowns of mortgage-backed securities 11,844,529 4,439,860 6,373,360
(Increase) decrease in overnight
earning deposits, net (599,672) 1,104,111 (404,563)
Investment in real estate owned - - (387,023)
Increase in bank premises
and equipment, net (592,142) (41,942) (433,014)
Decrease (increase) in Federal
Home Loan Bank stock 82,400 (82,400) (136,100)
Net cash used in investing
activities (25,991,336) (6,720,419) (30,171,391)
Cash flows from financing activities:
Increase in deposits, net 20,465,419 6,134,062 37,117,664
Increase (decrease) in advances from
Federal Home Loan Bank 4,500,000 1,000,000 (5,500,000)
Decrease in advances from borrowers
for taxes and insurance (8,339) (89,780) (21,674)
Net proceeds from stock options exercised 495,372 173,768 12,080
Repurchase of common stock (371,541) (99,990) -
Dividends on preferred and common stock (360,971) (165,240) (258,477)
Net cash provided by financing
activities 24,719,940 6,952,820 31,349,593
Net increase in cash and due from banks 109,265 259,675 2,652,494
Cash and due from banks,
beginning of period 3,894,884 3,635,209 982,715
Cash and due from banks, end of period $ 4,004,149 $ 3,894,884 $ 3,635,209
The accompanying notes are an integral part of these financial statements.
Notes to Consolidated Financial Statements
As of December 31, 1996 and 1995
1. Organization and Significant Accounting Policies:
Southern Financial Bancorp, Inc. (the "Bancorp"), was incorporated in the
state of Virginia on December 1, 1995. On December 1, 1995, the Bancorp
acquired all of the outstanding shares of the Southern Financial Bank (the
"Bank"). The Bank, formerly Southern Financial Federal Savings Bank,
converted from a savings bank to a state chartered commercial bank
effective December 1, 1995. The amounts presented as of June 30, 1995, and
for the year ended June 30, 1995 represent the financial position and
results of operations of Southern Financial Federal Savings Bank.
The principal activities of the Bank are to attract deposits, originate
loans and conduct mortgage banking activities as permitted for state
chartered banks by applicable regulations. The Bank conducts full-service
banking operations in Fairfax, Herndon, Leesburg, Middleburg, Warrenton,
Winchester and Woodbridge, Virginia.
The accounting and reporting policies of the Bancorp are in accordance with
generally accepted accounting principles and conform to general practices
within the banking industry. The more significant of these policies are
discussed below. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from
those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Bancorp and the Bank as of December 31, 1996 and 1995, and for the year
ended December 31, 1996, and for the six months ended December 31, 1995.
All significant intercompany accounts and transactions have been
eliminated.
Cash and Due From Banks and Overnight Earning Deposits
Amounts represent actual cash balances held by or due to the Bank.
Investment and Mortgage-Backed Securities
The Bancorp accounts for its investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
Investments in debt securities are classified as held-to-maturity when the
Bancorp has the positive intent and ability to hold those securities to
maturity. Held-to-maturity investments are measured at amortized cost.
The amortization of premiums and accretion of discounts are computed using
a method that approximates the level yield method. Investment and
mortgage-backed securities classified as available-for-sale are reported at
fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity on an after-tax
basis. Trading securities are reported at fair value with unrealized gains
and losses included in earnings. The specific identification method is
used to determine gains or losses on sales of investment and
mortgage-backed securities.
Loans Held for Sale
Mortgage loans originated which are intended for sale in the secondary
market are carried at the lower of cost or estimated market value in the
aggregate.
Impaired Loans
Effective July 1, 1995, the Bancorp implemented SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures."
A loan is considered impaired when, based on all current information and
events, it is probable that the Bancorp will be unable to collect all
amounts due according to the contractual terms of the agreement, including
all scheduled principal and interest payments. Such impaired loans are
measured based on the present value of expected future cash flows,
discounted at the loan's effective interest rate or, as a practical
expedient, impairment may be measured based on the loan's observable market
price, or if, the loan is collateral-dependent, the fair value of the
collateral. When the measure of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through a
valuation allowance. Loans for which foreclosure is probable continue to
be accounted for as loans.
Each impaired loan is evaluated individually to determine the income
recognition policy. Generally, payments received are applied in accordance
with the contractual terms of the note or as a reduction of principal.
At December 31, 1996, the Bancorp had identified impaired loans with a
carrying value of $1,676,064. At December 31, 1996, estimated collateral
proceeds were in excess of the carrying value of the loans and related
allowance for losses of $333,834. The Bancorp calculates the need for an
allowance for impaired loans based upon historical charge-offs, repayment
experience and specific factors concerning the impaired loans. The average
recorded investment in impaired loans for the year ended December 31, 1996
was $1,322,450. The Bancorp recognized interest income of $44,700 on its
impaired loans for the year ended December 31, 1996.
Loan Origination Fees
Nonrefundable loan fees and direct origination costs are deferred and
recognized over the lives of the related loans as adjustments of yield.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses which is charged to expense. Loans are charged against the
allowance for loan losses when management believes that the collectibility
of the principal is unlikely. The allowance is a current estimate of the
losses inherent in the present portfolio based upon management's evaluation
of the loan portfolio. Estimates of losses inherent in the portfolio
involve the exercise of judgment and the use of assumptions. The
evaluations take into consideration such factors as changes in the nature,
volume and quality of the loan portfolio, prior loss experience, level of
nonperforming loans, current and anticipated general economic conditions
and the value and adequacy of collateral. Changes in the estimate of
future losses may occur due to changing economic conditions and the
economic conditions of borrowers.
Accrual of interest is discontinued when management believes, after
considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection of interest is
doubtful.
Premises and Equipment
The Bancorp's premises and equipment are stated at cost less accumulated
depreciation and amortization. Expenditures for maintenance and repairs
which do not materially prolong the useful lives of the assets are charged
to expense.
Depreciation is computed using the straight-line method over estimated
useful lives of three to ten years for furniture and equipment and 30 years
for buildings. Amortization of leasehold improvements is computed using
the straight-line method over the shorter of ten years or the lease term.
Real Estate Owned
The Bancorp records and carries real estate acquired through foreclosure at
the lower of the recorded investment in the loan or fair value less
estimated selling costs. Costs relating to development and improvement of
property are capitalized, provided that the resulting carrying value does
not exceed fair value. Costs relating to holding the assets are expensed.
Core Deposit Intangibles
The Bancorp amortizes its core deposit intangibles over five years, which
represents the estimated lives of the depository accounts acquired.
Income Taxes
The Bancorp accounts for certain income and expense items differently for
financial reporting purposes than for income tax reporting purposes,
principally the provision for loan losses and loan related fees. Deferred
income taxes are provided in recognition of these temporary differences.
Earnings Per Share
Primary earnings per common share were computed by dividing income, less
dividends on preferred stock, by the average weighted number of shares of
common stock and common stock equivalents outstanding during the periods.
Common stock equivalents included the number of shares issuable on exercise
of outstanding options less the number of shares that could have been
purchased with the proceeds from the exercise of the options based on the
average price of common stock during the period. Fully diluted earnings
per common share were determined in the same manner except that common
stock equivalents also included the number of shares issuable on conversion
of the convertible preferred shares to common shares.
Financial Instruments with Off-Balance Sheet Risk
The Bancorp, in the normal course of business, is a party to financial
instruments with off-balance sheet risk primarily to meet the financing
needs of its customers. These financial instruments involve, to varying
degrees, elements of credit risk that are not recognized in the balance
sheet.
Exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and letters of
credit written is represented by the contractual amount of those
instruments. The Bancorp generally requires collateral to support such
financial instruments in excess of the contractual amount of those
instruments and essentially uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
Issued But Not Yet Adopted Statements of Financial Accounting Standards
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" was issued in June 1996 and is
effective for transactions on a prospective basis beginning January 1,
1997. Earlier or retroactive application is not permitted. This statement
provides accounting and reporting standards for transfers and servicing of
financial assets extinguishments of liabilities. Those standards are based
on consistent application of a financial-components approach that focuses
on control. Adoption of this Statement is not expected to have a material
impact on the Bancorp.
Reclassifications
Certain reclassifications were made to the prior year financial statements
to conform to the current year presentation.
2. Investment Securities:
The portfolio consists of the following securities:
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale:
FHLMC preferred stock $4,310,235 $11,355 $116,303 $4,205,287
December 31, 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale:
FHLMC preferred stock $2,810,425 $31,200 $14,000 $2,827,625
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held-to-Maturity:
FHLB Agency Callables $2,000,000 $ 1,875 $ - $2,001,875
The portfolio balance of FHLB Agency Callable Securities was $0 as of
December 31, 1995.
3. Mortgage-Backed Securities:
The portfolio consists of the following securities:
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale:
FNMA participation
certificates $902,824 $ - $8,492 $894,332
December 31, 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale:
FNMA participation
certificates $1,039,353 $5,745 $ - $1,045,098
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held-to-maturity:
FHLMC participation
certificates $ 7,300,246 $ 20,736 $ 52,650 $ 7,268,332
FNMA participation
certificates 21,981,743 42,607 183,797 21,840,553
GNMA participation
certificates 27,387,797 95,893 46,549 27,437,141
Collateralized mortgage
obligations 6,547,457 8,215 129,496 6,426,176
Total $63,217,243 $167,451 $412,492 $62,972,202
December 31, 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held-to-maturity:
FHLMC participation
certificates $ 9,397,071 $22,335 $ 72,688 $ 9,346,718
FNMA participation
certificates 12,065,698 - 185,819 11,879,879
GNMA participation
certificates 17,612,474 25,094 82,645 17,554,923
Collateralized mortgage
obligations 6,922,534 34,380 64,084 6,892,830
Total $45,997,777 $81,809 $405,236 $45,674,350
Held-to-maturity securities are carried at cost adjusted for amortization
of premiums and accretion of discounts. All of the held-to-maturity
securities other than $8.5 million of 15-year fixed rate securities have
adjustable rates of interest. The rates on approximately 17 percent of the
portfolio are tied to the 11th District and national cost of funds indices
and adjust monthly. The remaining rates are tied to the one year constant
maturity treasury index.
Available-for-sale securities are carried at fair value with unrealized
losses reported as a separate
component of stockholders' equity, net of the tax effect. All of the
available-for-sale securities have fixed interest rates.
There were no sales of mortgage-backed securities during the year ended
December 31, 1996.
During the six months ended December 31, 1995, net proceeds from sales of
available-for-sale
mortgage-backed securities were $4,848,694. Gross gains of $63,208 were
realized on the sale of
mortgage-backed securities during the six months ended December 31, 1995.
As of December 31, 1996 and December 31, 1995, mortgage-backed securities
having a book value of $49,743,572 and $30,124,830, respectively, were
pledged as collateral for advances from the Federal Home Loan Bank of
Atlanta ("FHLB") and as collateral for escrow deposits in accordance with
Federal and state requirements.
A comparison of amortized cost and market value for securities, along with
the contractual dates of maturity, by category of security as of December
31, 1996 is as follows:
Aggregate
Amortized Market
Cost Value
Available-for-sale securities:
Investment securities- $ - $ -
Mortgage-backed securities-
Maturing after ten years 902,824 894,332
Total available-for-sale securities $902,824 $894,332
Held-to-maturity securities:
Investment securities-
Maturing after one year, but within five years $2,000,000 $2,001,875
Mortgage-backed securities-
Maturing after ten years 63,217,243 62,972,202
Total held-to-maturity securities $65,217,243 $64,974,077
As of December 31, 1995, all investment and mortgage-backed securities had
maturity dates of after ten years.
4.Loans Receivable:
Loans receivable consist of the following:
December 31, December 31,
1996 1995
Mortgages:
Residential $ 35,032,684 $ 37,583,119
Nonresidential 46,548,847 36,742,339
Construction:
Residential 5,616,121 8,515,853
Nonresidential 7,510,374 11,028,772
Nonmortgages:
Business 12,197,921 9,265,345
Consumer 3,294,171 2,760,636
Total loans receivable 110,200,118 105,896,064
Less:
Deferred loan fees, net (412,274) (454,334)
Allowance for loan losses (1,500,941) (1,190,249)
Loans receivable, net $108,286,903 $104,251,481
The following sets forth information regarding the allowance for loan losses:
December 31, December 31,
1996 1995
Balance, beginning of period $1,190,249 $1,057,445
Charge-offs, net (384,308) (17,196)
Provision charged to income 695,000 150,000
Balance, end of period $1,500,941 $1,190,249
The Bancorp's loan portfolio is concentrated in the Northern Virginia area.
At December 31, 1996 and 1995, the average yield on loans receivable was
9.18 percent and 9.32 percent, respectively. The amount
of loans being serviced for others was $4,121,734 and $3,384,496 at
December 31, 1996 and 1995, respectively. At December 31, 1996, there were
no loans on which the Bancorp was still accruing interest which had
payments ninety days or more past due. At December 31, 1995, there were
seven loans on which the Bancorp was still accruing interest with a total
balance of approximately $881,028 which had payments ninety days or more
past due.
The loan portfolio includes loans on which the Bancorp is not currently
accruing any interest income. The total outstanding principal and
uncollected interest on these loans consists of the following:
December 31, December 31,
1996 1995
Principal outstanding $1,676,064 $591,049
Uncollected interest 220,461 27,675
There were no sales of real estate owned during the year ended December
31, 1996, the six months ended December 31, 1995, or the year ended June
30, 1995.
5.Bancorp Premises and Equipment:
The Bancorp's premises and equipment consists of the following:
December 31, December 31,
1996 1995
Land $ 125,647 $ 50,000
Building and improvements 587,980 350,424
Furniture and equipment 1,335,548 1,105,650
Leasehold improvements 996,885 947,843
3,046,060 2,453,917
Less- Accumulated depreciation and amortization (1,558,614) (1,307,364)
Bancorp premises and equipment, net $1,487,446 $1,146,553
Depreciation and amortization expense aggregated $251,249 and $111,303 for
the year ended December 31, 1996, and for the six months ended December 31,
1995, respectively.
6. Interest Receivable:
Accrued interest receivable consists of the following:
December 31, December 31,
1996 1995
Interest on loans $ 890,133 $ 840,385
Interest on mortgage-backed securities
and other investments 438,418 326,637
Total $1,328,551 $1,167,022
7. Real Estate Owned:
The following activity occurred during the year ended December 31, 1996 and
the six months ended December 31, 1995:
December 31, December 31,
1996 1995
Beginning balance $357,023 $387,023
Additions - -
Holding period write-down (17,000) (30,000)
Ending balance $340,023 $357,023
Balance represents one property in Loudoun County, Virginia.
8. Deposits:
Deposits consist of the following:
1996 1995
Weighted Weighted
Average Average
Interest Interest
Rate Amount Rate Amount
Checking accounts 0.65% $23,424,025 1.74% $18,881,792
Money market and savings accounts 3.23 21,502,863 3.37 19,302,329
Certificates of deposit 5.59 119,352,217 5.73 105,629,565
4.57% $164,279,105 4.89% $143,813,686
As of December 31, 1996, certificates of deposit have scheduled fiscal year
maturity dates as follows:
1997 $101,212,198
1998 10,791,485
1999 4,336,878
2000 3,011,656
$119,352,217
Deposits totaling approximately $24,135,017 and $19,611,149 had balances
greater than $100,000 at December 31, 1996 and 1995, respectively, of which
$13,861,572 and $11,595,231 represented certificates of deposit at December
31, 1996 and 1995, respectively.
Interest expense by deposit category follows:
1996 1995
Checking accounts $ 238,279 $ 135,574
Money market and savings accounts 683,839 314,728
Certificates of deposit 6,511,216 2,989,486
$7,433,334 $3,439,788
Total cash paid for interest aggregated approximately $2,628,853 and
$1,292,324 for the year ended December 31, 1996, and the six months ended
December 31, 1995, respectively.
9. Advances from Federal Home Loan Bank:
The Bancorp has a credit availability agreement with FHLB totaling
$25,000,000. The agreement does not have a maturity date and advances are
made at FHLB's discretion. At December 31, 1996 and 1995, advances from
FHLB totaled $8,500,000 and $4,000,000, respectively. Advances are made at
variable interest rates. The weighted average rates of interest were 6.57
percent and 5.85 percent at December 31, 1996 and 1995, respectively.
Advances outstanding at December 31, 1996, mature on February 14, 1997,
October 15, 1997, and January 30, 1998, and are secured by mortgage-backed
securities having a book value of $49,732,572.
The Bancorp has entered into interest rate cap agreements whereby the
counterparty institution agreed to cap the cost of a component of the FHLB
advances outstanding floating-rate debt for an agreed upon period of time.
The cap agreement was accounted for as a hedge. The cost of the interest
rate caps were amortized into interest expense on a straight-line basis
over the terms of the agreements. At December 31, 1996 and 1995,
respectively, the Bancorp had outstanding interest rate caps with a total
notional amount of $0 and $1,000,000.
10. Stockholders' Equity:
Each share of the Bancorp's preferred stock is convertible to 1.61 shares
of common stock. The preferred stock has an annual dividend rate of 6
percent. Dividends are payable quarterly and are cumulative.
The Bancorp's Board of Directors declared a 10 percent stock dividend in
July 1996 and 1995 and a four-for-three stock split in February 1995, which
was effected in the form of a dividend. All earnings per share amounts
have been calculated as if these distributions occurred on July 1, 1992,
the beginning of fiscal year 1993.
In December 1995, the Bancorp changed the par value of its common stock
from $8.00 per common share to $0.01 per common share. This resulted in a
decrease in common stock of $10,998,091.
In fiscal year 1987, the Bancorp's stockholders approved an incentive stock
option plan under which options to purchase up to 83,660 shares of common
stock could be granted. During fiscal year 1994, this plan was amended to
allow an additional 100,000 shares of common stock to be granted. In
accordance with the plan agreement, the exercise price for stock options
equals the stock's market price on the date of grant. The maximum term of
all options granted under the plans is ten years and vesting occurs after
one year.
The Bancorp accounts for its stock option plan under APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost
for the plan been determined consistent with Statement of Financial
Accounting Standards("SFAS") No. 123, "Accounting for Stock-Based
Compensation", the Bancorp's net income and earnings per share in the
Consolidated Statements of Income, would have been reduced to the following
pro forma amounts:
December 31,
1996 1995
Net income:
As reported $953,712 $735,319
Pro forma 603,344 522,390
Earnings per share:
As reported 0.62 0.49
Pro forma 0.39 0.35
Weighted-average assumptions:
Expected lives (years) 10.00 10.00
Risk-free interest rate (%) 6.06% 6.22%
Expected volatility (%) 45.00% 45.00%
Expected dividends (annual per share) - -
The Bancorp did not record any compensation costs in 1996 or 1995 related
to its stock option plan. In addition, no significant modifications to the
plan were made during the periods. The fair values of the stock options
outstanding used to determine the pro forma impact of the options to
compensation expense, and thus, net income and earnings per share, were
based on the Noreen-Wolfson option pricing model for each grant made in
1996 and 1995, using the key assumptions detailed above.
Compensation cost charged against historical net income in the above table
was increased by the fair value of stock-based compensation grants. The
compensation cost amounted to $350,368 and $212,929 for the year ended
December 31, 1996 and the six months ended December 31, 1995, respectively.
During the initial phase-in period, the effects of applying SFAS No. 123
to historical net income to provide pro forma disclosures are not likely to
be representative of the effects on reported net income for future years
because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995.
A summary of the status of the Bancorp's stock option plan as of December
31, 1996 and 1995, and changes during the year ended December 31, 1996, and
the six months ended December 31, 1995, is presented below. Average prices
and shares subject to options have been adjusted to reflect stock
dividends.
1996 1995
__________________ ________________
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning of year 188,792 $9.94 171,871 $9.82
Granted 66,029 13.43 45,980 13.18
Exercised 65,373 8.18 24,219 7.92
Forfeited - - - -
Expired 12,121 13.04 4,840 12.08
Outstanding at December 31, 177,327 11.02 188,792 9.94
Options exercisable at December 31, 112,127 125,891
Weighted average fair value
of options granted during the period $5.92 $6.01
The following table summarizes information about fixed stock options
outstanding at December 31, 1996.
Options Outstanding Options Exercisable
___________________________________ _______________________
Weighted
Remaining Average
Exercise Number Contractual Number Exercise
Price Outstanding Life Exercisable Price
months
$7.49 8,874 42 8,874 $7.49
7.75 12,907 6 12,907 7.75
8.83 30,653 90 30,653 8.83
8.99 4,840 18 4,840 8.99
9.30 7,260 30 7,260 9.30
9.61 16,940 78 16,940 9.61
11.98 30,653 103 30,653 11.98
12.73 15,403 115 - -
13.64 43,195 109 - -
13.64 6,602 112 - -
177,327 112,127
There were 10 option holders at December 31, 1996. Options exercised
during 1996 had exercise prices ranging from $6.81 to $10.57. Options
exercised during 1995 had exercise prices ranging from $6.81 to $10.57.
The closing price of the Bancorp's stock at December 31, 1996 was $13.50
per share.
On May 28, 1996, the Bancorp acquired 9,374 shares of its own stock at a
market price of $16.00 in a stock swap transaction with the Chief Executive
Officer. The shares acquired were accepted as payment to redeem 22,026
options to purchase common stock. This purchase was accounted for as
treasury stock by the Bancorp.
On July 30, 1996, the Bancorp acquired 14,771 shares of its own stock at a
market price of $15.31 in a stock swap transaction with the Controller. The
shares acquired were accepted as payment to redeem 22,000 options to
purchase common stock. The purchase was accounted for as treasury stock by
the Bancorp.
11. Regulatory Matters:
The Bancorp's primary supervisory agent is the Federal Reserve Bank. The
Federal Reserve Bank has mandated certain capital standards for the
industry. In addition, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") outlines various levels of capital
adequacy for the industry.
Effective January 1, 1994, the Bancorp implemented SFAS No. 115. This
pronouncement requires, among other items, the reporting of unrealized
gains and losses in available-for-sale securities in stockholders' equity.
At December 31, 1996, the Bank reported net unrealized losses of $76,006,
net of tax, in stockholder's equity. These net unrealized losses were
excluded from Tier I and Tier II capital for regulatory reporting in
accordance with current regulatory agency guidance.
The Bancorp is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulation that, if undertaken, could
have a direct material effect on the Bancorp's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bancorp must meet specific capital guidelines that
involve quantitative measures of the Bancorp's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bancorp's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitaive measures established by regulation to ensure capital adequacy
require the Bancorp to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December, 31, 1996, that the Bancorp meets all capital adequacy
requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal
Reserve Bank categorized the Bancorp as adequately capitalized under the
regulatory framework for prompt corrective action. To be categorized as
adequately capitalized the Bancorp must maintain minimum total risk-based,
Tier I risk- based, and Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the institution's category.
The Bancorp's actual capital amounts and ratios are also presented in the
tables below. (All dollar amounts are in 000s).
To be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Puproses Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1996:
Total Capital:
(to risk weighted assets) $17,554 16.6% =>$8,431 =>8.0% =>$10,539 =>10.0%
Tier I Capital
(to risk weighted assets) $16,234 15.4% =>$4,216 =>4.0% =>$6,323 =>6.0%
Tier I Capital
(to average assets) $16,234 8.7% =>$7,477 =>4.0% =>$9,346 =>5.0%
As of December 31, 1995:
Total Capital:
(to risk weighted assets) $16,628 15.9% =>$8,355 =>8.0 =>$10,443 =>10.0%
Tier I Capital
(to risk weighted assets) $15,438 14.8% =>$4,177 =>4.0% =>$6,266 =>6.0%
Tier I Capital
(to average assets) $15,438 9.6% =>$6,424 =>4.0% =>$8,030 =>5.0%
Legislation was enacted on September 30, 1996 that imposed on thrift
institutions a one-time assessment of 65.7 basis points on their
SAIF-insured deposits to capitalize the SAIF. The Bancorp was required to
pay the assessment since it was considered a thrift institution at the time
the SAIF legislation was initiated. During 1996, the Bank paid
approximately $830,270 for the SAIF assessment which is included in deposit
insurance assessments on the accompanying Consolidated Statements of
Income.
12. Parent Company Activity:
The Bancorp owns all of the outstanding shares of the Bank. The statement
of condition and statement of income are as follows:
Statement of Condition
As of December 31, 1996
Assets:
Investment in bank $16,443,483
Other assets 36,925
Total assets $16,480,408
Liabilities:
Other liabilities $ 3,450
Total liabilities $ 3,450
Stockholders' equity:
Preferred stock $ 156
Common stock 15,941
Capital in excess of par 15,276,373
Retained earnings 1,655,575
Treasury stock (471,087)
Total stockholders' equity 16,476,958
Total liabilities and stockholders' equity $16,480,408
Statement of Income
For the Year Ended December 31, 1996
Equity in earnings of Bank $ 953,712
13. Estimated Fair Value of Financial Instruments:
Effective December 31, 1995, the Bancorp implemented SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." SFAS No. 107
requires all entities to disclose the fair value of financial instruments,
both assets and liabilities recognized and not recognized in the statement
of financial position, for which it is practicable to estimate fair value.
If estimating fair value is not practicable, the statement requires
disclosure of descriptive information pertinent to estimating the value of
a financial instrument.
Some of the Bancorp's assets and liabilities are financial instruments;
however, certain of these financial instruments lack an available trading
market. Significant estimates, assumptions and present value calculations
were therefore used for the purposes of the following disclosure, resulting
in a great degree of subjectivity inherent in the indicated fair value
amounts. Comparability among financial institutions may be difficult due
to the wide range of permitted valuation techniques and the numerous
estimates and assumptions which must be made. The estimated fair values of
the Bancorp's financial instruments at December 31, 1996 are as follows:
December 31, 1996
Carrying Fair
Amount Value
Financial assets:
Cash and amounts due from banks $ 4,004,149 $ 4,004,149
Available-for-sale securities 5,099,619 5,099,619
Held-to-maturity securities 65,217,243 64,974,077
Loans receivable, net of reserve 108,286,903 108,336,794
Loans held for sale 444,500 444,500
Financial liabilities:
Deposits-
Checking accounts 23,424,025 23,424,025
Money market and savings accounts 21,502,863 21,502,863
Certificates of deposit 119,352,217 119,442,477
The following methods and assumptions were used to estimate the fair value
amounts at December 31, 1996:
Cash and Due From Banks
Carrying amount approximates fair value.
Available-for-Sale Securities
Fair value is based on quoted market prices.
Held-to-Maturity Securities
Fair value is based on quoted market prices, dealer quotes or estimates
using dealer quoted market prices for similar securities.
Loans Receivable, Net of Reserve
Fair value of certain homogeneous groups of loans (e.g., single-family
residential, automobile loans, home improvement loans and fixed-rate
commercial and multifamily loans) is estimated using discounted cash flow
analyses based on contractual repayment schedules. The discount rates used
in these analyses are based on either the interest rates paid on U.S.
Treasury securities of comparable maturities adjusted for credit risk and
non-interest operating costs or the interest rates currently offered by the
Bancorp for loans with similar terms to borrowers of similar credit
quality. For loans which reprice frequently at market rates (e.g., home
equity, variable-rate commercial and multifamily, real estate construction
and ground loans), the carrying amount approximates fair value.
Loans Held for Sale
Fair Value is determined using quoted market prices for loans or outstanding
commitment prices from investors.
Deposits
Deposit liabilities payable on demand, consisting of NOW accounts, money
market deposits, statement savings and other deposit accounts, are assumed
to have an estimated fair value equal to carrying value. The indicated
fair value does not consider the value of the Bancorp's estimated deposit
customer relationships.
Fair value of fixed-rate certificates of deposit is estimated based on
discounted cash flow analyses using the remaining maturity of the
underlying accounts and interest rates currently offered on certificates of
deposit with similar maturities.
Off-Balance Sheet Instruments
The difference between the original fees charged by the Bank for
commitments to extend credit and letters of credit and the current fees
charged to enter into similar agreements is immaterial.
14. Savings Plan:
In fiscal year 1993, the Bancorp began an employee savings plan (the
"Savings Plan") that qualifies as a deferred salary arrangement under
Section 401(k) of the Internal Revenue Code. Under the Savings Plan,
participating U.S. employees may defer a portion of their pretax earnings,
up to the Internal Revenue Service annual contribution limit. The Bancorp
matches each employee's contributions on a discretionary basis, based on
Bancorp profits up to a maximum of 6 percent of the employee's earnings.
The Bancorp expects to make a cash contribution by March 15, 1997, covering
the year ended December 31, 1996. The Bancorp's cash contributions to the
Savings Plan were $22,943 and $28,385 for the years ended December 31, 1996
and 1995, respectively.
15. Provision for Income Taxes:
The provision for income taxes consists of the following:
Year Ended Six Months Ended Year Ended
December 31, December 31, June 30,
1996 1995 1995
Current provision:
Federal $483,449 $320,154 $760,309
State - 32,758 90,771
483,449 352,912 851,080
Deferred (benefit) provision:
Federal (13,849) 58,072 (16,929)
State - 3,416 (1,081)
(13,849) 61,488 (18,010)
$469,600 $414,400 $833,070
Deferred income taxes reflect temporary differences in the recognition of
revenue and expenses for tax reporting and financial statement purposes,
principally because certain items, such as the allowance for loan losses
and loan fees, are recognized in different periods for financial reporting
and tax return purposes. Realization of the deferred tax asset is
dependent on generating sufficient taxable income. Although realization is
not assured, management believes it is more likely than not that all of the
deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if
estimates of future taxable income are reduced. Total cash paid for taxes
aggregated $916,000 and $550,350 for the year ended December 31, 1996,
and for the six months ended December 31, 1995, respectively.
Deferred tax assets and liabilities were comprised of the following
significant components as of December 31, 1996 and 1995:
1996 1995
Assets:
Provision for losses on loans and real estate owned $198,125 $ 53,526
Deferred loan fees 161,820 219,676
Depreciation 83,923 67,308
Gross deferred tax assets 443,868 340,510
Liabilities:
FHLB dividend 35,771 35,771
Valuation of Loans and Securities 39,074 -
Other 64,577 14,142
Gross deferred tax liabilities 139,422 49,913
Net deferred tax assets $304,446 $290,597
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory Federal income tax
rate to pretax income as a result of the following differences:
Year Ended Six Months Ended Year Ended
December 31, 1996 December 31, 1995 June 31, 1995
Pretax income 34% 34% 34%
State taxes - 2% 5%
Dividends received
deduction (1%) - -
Effective tax rate 33% 36% 39%
16. Commitments:
The Bank leases its corporate headquarters and branch facilities under
operating lease agreements expiring through 2001. As of December 31, 1996,
future minimum lease payments required under these arrangements, assuming
no extension options are exercised, are as follows:
Years Ending
December 31, Minimum Lease Payments
1997 $440,549
1998 377,892
1999 244,041
2000 218,487
2001 168,148
Thereafter
Rent expense aggregated $504,647 and $240,976 for the year ended December
31, 1996, and for the six months ended December 31, 1995, respectively.
Outstanding loan commitments amounted to $9,119,150 and $6,402,500 at
December 31, 1996 and 1995, respectively. The Bank had commitments from
investors of $2,769,800 and $4,525,600 to purchase loans from the Bank at
December 31, 1996 and 1995, respectively.
At December 31, 1996, the Bank had commercial letters of credit outstanding
in the amount of approximately $251,907.
At December 31, 1996, the Bank had unfunded lines of credit of $10,724,839.
BOARD OF DIRECTORS
Georgia S. Derrico
Chief Executive Officer
Southern Financial Bank
Neil J. Call John L. Marcellus, Jr.
Executive Vice President Retired President &
MacKenzie Partners Chairman of the Board
Oneida, Ltd.
David de Give R. Roderick Porter
Senior Vice President/Lending President
Southern Financial Bank Fx Concepts
Virginia Jenkins Michael P. Rucker
Owner Executive
V. Jenkins Interiors Caterpillar, Inc.
Officers
Georgia S. Derrico
Chairman of the Board & CEO
David de Give
Senior Vice President/Lending
William H. Lagos
Senior Vice President/Controller
Linda W. Sandridge Laura L. Vergot
Vice President/ Vice President/
Construction Lending Branch Development
Susie Pontiff Lynette D. Ridgley
Assistant Vice President/ Assistant Vice President/
Winchester Region Corporate Affairs and
Corporate Secretary
Virginia M. Carter
Assistant Vice President/
Information Systems
Bank Offices
Main Office:
37 E. Main Street
Warrenton, Virginia 20186
(540) 349-3900
Branches:
362 Elden Street 526 E. Market Street
Herndon, Virginia 20170 Leesburg, Virginia 20175
(703) 478-5300 (703) 777-7080
Michelle Buckles, Manager Robin May, Manager
101 W. Washington Street 11180 Lee Highway
Middleburg, Virginia 20117 Fairfax, Virginia 22030
(540) 687-3500 (703) 691-3131
Heather Lyne, Manager R.T. "Rusty" Gibson, Jr., Manager
35 W. Piccadilly Street 322 Lee Highway
Winchester, Virginia 22601 Warrenton, Virginia 20186
(540) 667-1100 (540) 341-3634
Terri Hirst, Manager Nancy Albert, Manager
2545 Centreville Road, Q-18 13542 Minnieville Road
Herndon, Virginia 20171 Woodbridge, Virginia 22912
(703) 713-1300 (703) 680-6100
Ron Raab, Manager Susan B. Nelson, Manager
1095 Millwood Pike
Winchester, Virginia 22601
(540) 665-1690
Kim Dansbach, Manager
Banking Services
Home Mortgage Loans
Competitive rates and terms can help make the purchase or
refinance of your home more affordable.
Construction Loans
Southern Financial specializes in home construction loans and lets
you be your own general contractor.
Small Business Administration Loans
With as little as 10%, the small business can afford to expand under SBA
economic development programs. We specialize in the 504 and 7(a) programs.
Consumer Loans
Creditworthy customers may choose from a variety of terms with
competitive rates. Southern Financial offers both secured and unsecured
consumer loans.
Statement Savings
A flexible savings plan that provides both interest and easy
access to funds.
Totally Free Checking
A non-interest bearing checking account that has no monthly
service charge, no minimum balance
requirement, and unlimited check writing.
Premier Checking
An interest bearing checking account, paying interest on daily
collected funds of $500., and greater, with unlimited check writing. A
monthly service is imposedif the balance falls below $500., during the
statement period.
Management Checking
A non-interest bearing account with unlimited check writing. A
monthly service charge is imposed if the balance falls below $1000. during
the statement period. Cancelled checks are included in the statement.
Commercial Checking
A checking account for individual businesses featuring a low
minimum balance requirement and tailored for your specific business needs.
Money Market Accounts
Flexibility, liquidity and competitive interest rates are key
features of our money market accounts. No fixed terms or penalties for
withdrawals (up to three per month).
Individual Retirement Accounts
Southern Financial offers IRA, SEP, and Keogh accounts as
investment options for your retirement plans.
Certificates of Deposit
Competitive interest rates and a variety of terms to meet any
investment need.
Southern Financial customers are also offered the following
services:
Free Automated Teller Machine Use (Honor, Plus)
Direct Deposit
Safe Deposit Boxes
Travelers Cheques
Overdraft Protection
Visa Cards
Direct Teller
CORPORATE PROFILE
Southern Financial Bancorp, Inc. and its sole subsidiary,
Southern Financial Bank, merged with Southern Financial Federal
Savings Bank on December 1, 1995 and continues the Savings Bank's
ten years of operation from its main officer in Warrenton,
Virginia. The Bank serves the northern Virginia area through its
full-services branches located in Herndon, Middleburg, Warrenton,
Winchester, Leesburg, Fairfax, and Woodbridge.
The principal business of the state chartered bank is the
taking of deposits from the general public through its home and
branch offices. These deposits and other borrowed funds are then
used for the origination of adjustable rate and, to a lesser
extent, fixed rate first and second mortgage loans for the purpose
of constructing, financing or refinancing one- to four-family,
owner-occupied residential real estate in northern Virginia and
the surrounding Washington, DC suburbs. Southern Financial
generally retains in portfolio the adjustable rate mortgages and
sells the originated fixed rate mortgages on the secondary market.
The Bank is currently focusing on expanding its commercial
lending program. The Bank has created a substantial niche in the
Small Business Administrations' 504 and 7(a) Loan Programs for the
northern Virginia area. The 504 and 7(a) programs offer borrowers
access to 90% financing of a project, 50% of which is provided by
the financial institution. Southern Financial endorsees this
program which carries low credit risk and provides small
businesses the opportunity to expand and to create new jobs in the
local communities. The 7(a) program can be used for most business
needs including the purchase of real estate, leasehold
improvements, the purchase of furniture, fixtures, machinery and
equipment, inventory and operating capital.
At December 31, 1996, Southern Financial Bancorp, Inc.
consolidated balance sheet had total assets in excess of $190
million and stockholder's equity in excess of $16 million.
Southern Financial Bancorp, Inc. is a publicly-held bank holding
company. Trading on the NASDAQ National Market System under the
symbol, SFFB, Southern Financial had 1,594,122 shares of common
stock outstanding as of December 31, 1996. There are four market
makers for the Southern Financial Bancorp, Inc. common stock
including Ferris, Baker, Watts, Inc.; Friedman, Billings, Ramsey &
Co.; Herzog, Heine, Geduld, Inc.; and Scott & Stringfellow.
A map of Virginia showing the location of offices of Southern
Financial Bank has not been reproduced.
CORPORATE INFORMATION
ADDRESS:
37 East Main Street
Warrenton, Virginia 20186
(540) 349-3900
FAX (540) 349-3904
FORM 10-K
The Bank's Annual Report on Form 10-K to the Securities and
Exchange Commission will be furnished without charge to
stockholders upon written request to:
Lynette D. Ridgley
Investor Relations
37 E. Main Street
Warrenton, VA 20186
REGISTRAR & TRANSFER AGENT:
Chase Mellon Shareholder Services
450 W. 33rd Street
15th Floor
New York, NY 10001
(800) 526-0801
ANNUAL MEETING
The annual meeting of stockholders of Southern Financial Bancorp,
Inc. will be held on April 24, 1997 at the Fauquier Springs
Country Club, Springs Road, Warrenton, Virginia commencing at 3:00
pm.
STOCK DATA:
NASDAQ Symbol: SFFB
As of December 14, 1993, the Common Stock of Southern Financial
Federal Savings Bank commenced trading on the NASDAQ Small Cap
Stock Market under the symbol, SFFB. On February 21, 1995, the
Common Stock commenced trading on the NASDAQ National Market under
the symbol SFFB. On December 1, 1995 Southern Financial Federal
Savings Bank merged into Southern Financial Bank, a wholly owned subsidiary
of Southern Financial Bancorp, Inc. The Bancorp's Common Stock
continues to be traded on the NASDAQ National Market under the
symbol SFFB.
As of December 31, 1996, there were approximately 274 stockholders
of record, not including the number of persons or entities whose
stock is held in nominee or "street" name through various
brokerage firms or banks. The following table sets forth the high
and low stock prices for the periods indicated:
1996*
HIGH LOW
1st Quarter $15.23 $13.41
2nd Quarter 15.91 13.64
3rd Quarter 15.12 12.50
4th Quarter 14.50 13.50
*Prices adjusted to reflect a 10% stock dividend payable to
shareholders of record on August 16, 1996.
MARKET MAKERS:
Ferris Baker, Watts, Inc.
(202) 429-3545
Friedman, Billings, Ramsey & Co.
(703) 312-9531
Herzog, Heine, Geduld, Inc.
(800) 221-3600
Scott & Stringfellow
(800) 552-7757